A43 Malgorzata Barbara Havel: PROPERTY RIGHTS REGIME IN LAND DEVELOPMENT - ANALYSIS OF THE INFLUENCE INSTITUTIONS ON Kiinteistöopin ja talousoikeuden julkaisuja Espoo 2009 A43 PROPERTY RIGHTS REGIME IN LAND DEVELOPMENT - ANALYSIS OF THE INFLUENCE OF INSTITUTIONS ON LAND DEVELOPMENT IN TERMS OF PROPERTY RIGHTS THEORY Malgorzata Barbara Havel DEVELOPMENT IN TERMS OF PROPERTY RIGHTS THEORY ISBN 978-952-248-177-1 ISSN 0785-5079 Kiinteistöopin ja talousoikeuden julkaisuja Espoo 2009 A 43 PROPERTY RIGHTS REGIME IN LAND DEVELOPMENT - ANALYSIS OF THE INFLUENCE OF INSTITUTIONS ON LAND DEVELOPMENT IN TERMS OF PROPERTY RIGHTS THEORY Małgorzata Barbara Havel Dissertation for the degree of Doctor of Science in Technology to be presented with due permission of the Faculty of Engineering and Architecture, for public examination and debate in Auditorium M1 at Helsinki University of Technology, Espoo, Finland, on the 4th of December, 2009, at 12 noon. Helsinki University of Technology Faculty of Engineering and Architecture Department of Surveying Teknillinen korkeakoulu Maanmittaustieteiden laitos PL 1200 02015 TKK Puh. +358 9 470 23871 E-mail: [email protected] © Małgorzata Barbara Havel ISBN 978-952-248-177-1 (print) ISBN 978-952-60-3671-7 (pdf) ISSN 0785-5079 Multiprint Oy Espoo Espoo 2009 HELSINKI UNIVERSITY OF TECHNOLOGY ABSTRACT OF DOCTORAL DISSERTATION Faculty of Engineering and Architecture Author: Małgorzata Barbara Havel Name of the thesis: Property rights regime in land development process – Analysis of the influence of institutions on land development in terms of the property rights theory th Date: 4 December 2009 Language: English Number of pages: 311 p. Field of research: Real Estate Economics and Valuation Opponents: Pre-examiners: Professor Thomas Kalbro Professor Erwin van der Krabben Professor Erwin van der Krabben Professor Frances Plimmer Supervisor: Prof. Kauko Viitanen Abstract In the current institutional models, land development is primarily viewed as a process of social interaction in which informal institutional structures, strategies and personal characteristics of agents are influential. The institutional-economic models of land development emphasise the roles of uncertainty, incomplete information or transaction costs. Just recently, attention started to be paid to the formal ‘rules of the game’ and the property rights regime in land development processes. The purpose of this study is to increase knowledge on the role of the property rights regime in land development and contribute to the further conceptualisation of the impact of the institutions on land development. This study addresses the question of what constitutes the elements of the property rights regime in land development and how the differences in the property rights regime can explain differences in the land development processes. In order to achieve the aim of this study, the analytical model of land development based on the property rights approach is proposed and a comparative analysis on the influence of the property rights regime on land development methods in two countries is conducted. The research approach in this study is a mixture of some key characteristics of qualitative and comparative approaches. In the analytical model developed in this study, the distribution of ‘rights’ in the property rights regime in land development is the central concept. Within the property rights regime the explanatory variables were identified, which are important characteristics of the property rights regimes. The explanatory variables are: the position of the municipality in the development process, the flexibility versus certainty in development control, and the economic right in land development. The delineation and allocation of rights in connection to the explanatory variables were investigated in comparative research in two countries. Furthermore, the distribution of rights within the property rights regime was discussed in relation to the methods of land development. The empirical research shows how institutions affect the market processes. Keywords: land development, property rights regime, property rights theory The power of a theory is exactly proportional to the diversity of situations it can explain. All theories, however, have limits. Models of a theory are limited still further because many parameters must be fixed in a model, rather than allowed to vary. Confusing a model – such as that of a perfectly competitive market – with the theory of which it is one representation can limit applicability still further. Scientific knowledge is as much an understanding of the diversity of situations for which a theory or its models are relevant as an understanding of its limits. Elinor Ostrom (1990, p.24) ACKNOWLEDGEMENTS I would like to express my gratitude to the supervisor of this thesis, Professor Kauko Viitanen of Helsinki University of Technology, for his support and kind encouragement throughout the years of my study. I would also wish to express my appreciation to all those who facilitated the research through their provision of valuable advice and information. I am deeply indebted to Dr. Edwin Buitelaar for his comments to the earlier draft of the theoretical framework of the thesis and interesting discussion about new institutional economics! During my stay in the city of Oulu I had a chance to learn about land development processes in Finland. I am grateful to Kaija Puhakka and all colleagues from the Technical Department of the city of Oulu for very warm welcome and support. I am deeply indebted to Professor Erwin van der Krabben and Professor Frances Plimmer, who were pre- examiners of my thesis, for comments which improved the quality of my work. Sincere thanks go to two lawyers who supported me during the research process, from Poland Dr. Magdalena Załęczna and from Finland Professor Erja Werdi. I am deeply indebted to Professor Raine Mäntysalo, Helsinki University of Technology, for his comments to the thesis and especially I am very grateful for inviting me to the discussion circle ‘Top Club’ and taking care of me in the working environment of YTK Centre for Urban and Regional Studies, where I had a possibility to meet people with similar research interest. I want to thank my colleagues from the Department of Surveying, especially all nice people in the ‘Café room’. I am also deeply indebted to Marjatta Huuhtanen and Jaana Seppälä for their patience in correcting my English! I want to address a special word of gratitude to the family Kervinen for taking care of us and showing us the beautiful Finnish culture. I will always remember smoke sauna, summer cottages with view on the lake in the forest, crayfish party and a lot of nice evenings we had together. I have also not forgotten the help I received from Agnieszka Buska when I was visiting Finland in the beginning of my study. I am very grateful for this. Finally, I owe everything to my family. I am grateful to my mother for her continues support in my study! Special thanks to my sister. I am also very grateful to my husband František who decided to move his professional career to Finland because of my study. Special thanks go to Dagmar Havlova for her careful revision of all references in the thesis! I dedicate this work to my beloved daughter Julia, who already decided, being almost 10 years old, that she will never do it, what I am doing, because it is too much work, or she will do it much faster! Małgorzata Barbara Havel Espoo, Finland, October 2009 This thesis is based on research funded by: Academy of Finland (Decision nr. 210506/2004) Jenny ja Antti Wihurin Foundation Finnish Cultural Foundation Maanmittausalan edistämissäätiö Helsinki University of Technology The Graduate School of Real Estate, Construction and Planning (KIRSU) Helsinki City Board City of Oulu The support of all institutions is gratefully acknowledged CONTENTS Abstract Acknowledgements Contents INTRODUCTION 13 Background 13 Aim and objectives of the study 17 Research approach and methodology 17 Significance of the study 21 Structure of the thesis 22 PART ONE THEORETICAL FRAMEWORK 25 Chapter One A NEOCLASSICAL AND WELFARE ECONOMICS APROACH TO STUDY BUILT ENVIRONMENT 27 1.1 A neoclassical and welfare economics approach to planning and development. Market failure 27 1.2 Government failures 30 1.3 The traditional discussion: ‘market versus government’ in land use planning. Failures and advantages of both approaches 31 1.4 Criticism of the land development models derived from the neo-classical tradition 35 1.5 Recapitulation 37 Chapter Two INSTITUTIONAL AND INSTITUTIONAL-ECONOMIC THEORIES 39 2.1 Definitions and delimitations of institutions. Institutions in respect to land and property markets 39 2.2 Institutional models. Different approaches to the study of institutions in property research 43 2.3 Economic approach to institutions. Institutional-economic theory 49 2.4 The model of the development process based on the institutional-economic theory 52 2.5 Conclusion of institutional and institutional-economic theories 54 2.6 Further reasoning for the scope of the research 54 Chapter Three PROPERTY RIGHTS THEORY 57 3.1 Introduction to property rights theory. How property rights emerge? 57 3.2 Property rights in land 63 3.3 Planning and land development in terms of property rights theory 66 3.4 The mechanisms of co-ordination and governance structures 70 3.5 The property rights regime 75 3.6 How should property rights be delineated and assigned to improve market efficiency? 77 3.7 Recapitulation 82 Chapter